How to Sell Your Machine Shop for the Best Price Possible
Find out how to secure the highest price for your machine shop.
The future is bright for those looking to sell their business in the year 2017. Optimism about the economy and mergers and acquisitions markets has been building over the past couple of months, and it is the perfect time to plan your exit. Many businesses are more actively considering selling as the economy continues to prosper. The machine shop service industry is still a successful and growing sector, despite the continued changes associated with technology and its impact on the market. Even if you are not ready to sell at this point in time, it is still important to know what your business is worth and where you stand financially. The first step to planning for the sale of your machine shop is getting a valuation. While only a professional business intermediary can tell you the true value of your machine shop, these formulas can give you an idea of what goes into the valuation process and how our brokers determine the sales price. It is important to examine the excess earnings approach when valuing a machine shop. In general, increased revenues and cash flow result in higher valuation multiples.
- 50 to 65 percent of annual revenues include inventory
- 2 to 3 times SDE plus inventory
- 5 to 7 times EBIT
- 3 to 5 times EBITDA
Now that you have an idea of what matters during the valuation, you can begin the first part of your exit planning journey which is increasing the value of your business. After all the years of dedication that come with starting and building a successful machine shop, you certainly want to earn some of that back. After selling several machine shops over the years, we have compiled a list of tips to help you increase the value of your business so that it will sell for the best price possible.
Certifications are becoming a very important aspect for strategic buyers planning to buy a machine shop and can be a useful tool to add credibility by demonstrating that your service meets the expectation for your customers. The International Organization for Standardization (ISO) provides a certification that gives world-class specifications for products, services, and systems to ensure quality, safety, and efficiency. Quality certifications such as ISO 9000 can help the multiple significantly. Earning your tenure as a machinist can certainly help as well because skilled machinists are difficult to find. Getting involved with an industry association can also help increase the price of your machine shop by creating valuable connections and helping you grow your business as much as possible through networking and training.
WIP and Raw Materials
Most machine shops are successful, stable businesses, so it is important to remember work in progress when negotiating the transaction. Work in progress is extremely important when selling your machine shop, as are raw materials. Understanding the flow of manufacturing costs from one area of production to another is necessary before selling. Production costs include materials and labor used in producing goods as well as allocated overhead. Backlog, a line-item expense for repairs and maintenance, availability of qualified labor, and client industry trends are all issues a potential buyer should investigate in valuing a machine shop.
The condition of machines and the level of technology within the shop are significant influences that can affect the price of your machine shop. Short run machine shops using design and prototyping capabilities could demand a premium. The drop in manufacturing technology orders is due to smaller manufacturers feeling a sense of economic concern, and therefore being unsure about making any type of capital investment. Any equipment that needs to be repaired or replaced should be taken care of before attempting to sell your machine shop.
Close attention should be paid on the measure of how total revenue is distributed among your customer base. Customer concentration can determine the success of a business, and can significantly affect your closing price later down the road. Some industries tend to have higher concentrations than others. The risk of high client concentration is always a concern with contract manufacturing and should be monitored regularly.
If you have been contemplating the future of your machine shop, we hope these four tips have helped you identify ways to boost the value. After all the years of hard work and dedication, you deserve to cash in on your time and energy. Viking M&A wants to be there to guide you along the way. The economy in the Southeast is booming right now, and growing cities such as Charlotte, Greenville, and Tampa are catching the eyes of buyers looking to expand. If you are thinking about selling your business, the first step is a valuation, which we offer at no cost, no-obligation. Let 2017 be the year to start planning for the sale of your business today.